Future growth needs freedom now

September 22, 2010, 00:14am

RICHARD WELLINGS
DEPUTY EDITORIAL DIRECTOR, IEA

WHEN the Soviet Union collapsed it seemed obvious that economic freedom was essential if individuals and societies were to thrive. But in the 20 years since, the enemies of liberty have fought back. The vested interests and bureaucracies that rely on big government have increasingly used environmental objectives and notions of social inclusion and fairness to justify imposing new taxes and controls on business activities.

The recent recession has provided opponents of economic freedom with still more ammunition. A slump caused primarily by loose monetary policy, ill-conceived regulations and flawed US housing policies has been widely misrepresented as an example of market failure. In this context, the latest edition of Economic Freedom of the World is depressing reading.

This year’s report includes data from 2008, when the slowdown really kicked in. It shows the first decline in global economic freedom for decades, as governments responded to the crisis by ratcheting up the level of state intervention with bank bailouts, tighter financial regulations and Keynesian stimulus measures.

The UK is no exception to the negative global trend, but there is one big difference. Economic freedom in Britain began to be eroded at the end of the 1990s, well before the credit crunch hit. In the last decade the country’s rank has fallen from sixth freest to 10th freest. The UK may well drop out of the top 10 next year.

This trend is very worrying. There is a strong long-term correlation between economic freedom and economic growth. Low taxes and light-touch regulation provide an environment in which entrepreneurs can flourish and generate the wealth that lifts people out of poverty. Yet Britain’s policymakers appear to have lost sight of this key lesson. Prosperity has been taken for granted and resources have increasingly been transferred from productive businesses to non-productive government spending in order to pursue social objectives and satisfy vocal interest groups.

Such policies have helped create record peacetime budget deficits and are no longer
sustainable. British policymakers therefore need to rediscover the importance of economic freedom. A credible deficit reduction programme is a good start. In five years’ time, the government forecasts that public spending as a share of GDP will be significantly lower than it is today. But the coalition needs to go much further to make the UK once again one of the world’s most competitive and dynamic economies. A systematic programme of deregulation should be a key priority and the vast majority of controls imposed in the past decade should be rescinded. At the same time, counterproductive tax rises on high-earners and investors should be reversed and tax cuts for wealth creators introduced at the earliest opportunity. This is the best way to avoid a double-dip recession.

Dr Richard Wellings is deputy editorial director at the Institute of Economic Affairs
(www.iea.org.uk)

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